Vermilion Energy Inc.’s $400-million purchase of a private southeast Saskatchewan oil producer could set the stage for more acquisitions in the region.

TD Securities analyst Travis Wood, who upgraded Vermilion to buy from hold and hiked his price target to $75 from $66, believes the unnamed company is Elkhorn Resources Inc.

The deal, which is expected to close at the end of April, includes $55-million of assumed debt, and will be funded by 50% cash and 50% stock.

“Although not a material area for Vermilion today, we are of the view that the company could look to further consolidate southeast Saskatchewan opportunities,” Mr. Wood told clients, noting the attractiveness of high netback light oil, quick payouts, relatively low risk conventional development, and stable decline rates.

He also pointed out that this new Canadian development area should help drive Vermilion’s free cash flow given the estimated $60 per barrel of oil equivalent cash flow netback and relatively low sustaining capital requirements.

Most of the production and activity is expected to come from the Midale formation, but Mr. Wood also believes there will be option value relating to the Torquay formation.

The analyst doesn’t base his investment thesis on well economics, but he did point out the average Midale well would drive a return of more than 100% and payout in less than a year.

“We have always viewed Vermilion as a core oil holding within our investment matrix, driven by what we believe is a sustainable dividend-growth business that generates top-quartile return on common equity and profit margins, compounded by a suite of assets that we believe provides significant option value to shareholders,” Mr. Wood said.